The Century FoundationThe Century FoundationThe Century Foundation

The Century Foundation takes your data security and privacy seriously. That's why we want you to know that, when you visit our website, we use technologies like cookies to collect anonymized data so that we can better understand and serve our audience. For more information, see our full Privacy Policy.

Companies Forgot to Bring the Pay Raises to the Labor Day Party

On the eve of Labor Day, the U.S. Department of Labor gave its latest reading on the job market as families and the economy move into the busy fall season. Today’s data showed the eight-year recovery continued but with less momentum than in August—adding 156,000 jobs in the month of August after adding 200,000 jobs earlier this summer (June and July). The end goal remains elusive—the big pay raise that Americans have been waiting for to show that good economic times might finally be back.

The brightest news in the report comes from the nation’s factories, which added 36,000 jobs in August (the best reading since August 2013). The nation’s factories have now added back 1 million jobs since losing 5.7 million jobs during the recession—meeting a goal originally set out by President Obama during his 2012 reelection campaign. Also on the positive side, the number of those underemployed in part-time jobs continues to trend down, declining by 27,000 in August from July, capping a decrease of nearly 800,000 workers over the past year.

Sign up for updates.

Indicators from the household report show that we still have a long time before the economy reaches the point where it’s taking full advantage of the skills of the U.S. workforce. Labor is still not reaching the one-out-of-four jobless workers (24.7 percent) who have been out of work for more than twenty-seven weeks and who are desperate for good-paying work. The labor force participation rate held steady at 62.9 percent, still well below its level at the end of the recession (65.7 percent in June 2009). With the labor force participation rate so low and the population aging, the best measure of the recovery is the percentage of prime age Americans (25-54) who are working. The prime age-employment rate of 78.4 percent actually dipped down by 0.3 percent in August and is well off its pre-recession levels (79.7 percent in November 2007).

But the most vexing problem is wage growth. Even with so much of the data showing that the labor market is getting tighter, employers have been setting a historical precedent for wage stagnation. A healthy rate of hourly pay during periods of strong economic growth is 3 to 4 percent per year—a rate reached most recently in 2000 and 2006. However, during this boom we have not cracked the 3 percent threshold. As of August, wages of regular (nonsupervisory) workers have grown a mere 2.3 percent since last year.

Figure 1

Figure 1 plots the unemployment rate and wage increases. The takeaway is clear—when the unemployment rate dropped to 4 percent in the early and mid 2000s, wage growth accelerated to 4 percent. And it hit 4 percent in the 1990s, when the unemployment rate bottomed out above 5 percent. We are simply seeing nothing close to that trend today. Wage growth has decelerated since a recent high point of 2.7 percent in September 2016 (a big increase from a low of 1.3 percent in July 2012); since then, growth has ranged from 2.3 to 2.5 percent.

One recent bright spot has been wage growth among low-skilled occupations, which has moved closer (2.8 percent) to the growth rates of higher-skilled occupations. On the industrial side, leisure and hospitality workers—many of which work in low-wage occupations—have seen an impressive wage growth of between 3.5 to 4 percent since mid-2016.

What explains this muted wage growth overall, when economic theory and similar past situations indicate that wage growth should accelerate as the unemployment rate declines? There are a number of possible explanations.

We have not fully recovered from the Great Recession: We are 15 percent below what GDP would have been if it had been growing at its pre-recession rate. Demand for goods and services in the economy is below potential, and spending has not caught up to pre-crisis levels. Furthermore, businesses aren’t investing or expanding as much as they could be, which corresponds with lower productivity—or output per hour of work—and weak wage growth. With employment rates still lagging behind their historic peaks and the long-term unemployed still desperate for work, employers may still be able to meet their workforce needs without spiking wages.

Businesses’ power is strong: The rise of “superstar firms”—massive companies that dominate their industry and markets—could be contributing to workers’ diminishing share of wages. When a few companies dominate an industry, they can offer low wages because there are no other firms in competition for workers. This market failure, known as monopsony, is monopoly’s twin, and it’s gaining increasing attention from economists.

The Fed: Monetary policy matters, too. The Federal Reserve has raised interest rates three times this year, which pumps the brakes on economic expansion. Raising rates could depress wage growth and employment. Thankfully, many at the Fed are more cautious, wanting stronger evidence of economic growth and inflation before they vote rate increases into effect. Rates were kept at 1 to 1.25 percent in the July FOMC meeting, and Janet Yellen’s statements at Jackson Hole this month led many to believe (including the markets) that the rate will stay the same until 2018.

The Boomers are leaving full-time work:Shifts in the composition of the workforce may be dampening wage growth. Baby boomers that earned high wages are retiring or taking part-time jobs while they are aging, while lower-wage workers that have been out of work since the recession are taking on new full-time positions. But while demographic factors may be at work, this still means that younger workers are earning lower wages and have less money to spend.

Workers’ bargaining power is weak: Some labor economists contend that a lack of worker bargaining power is stunting wage growth. So long as employers can find people willing to work for low wages, growth in pay rates will be modest. The proliferation of non-compete clauses, where workers agree not to leave a job to work for the employer’s competitor, make it harder for employees to move around the labor market in search of better pay and career advancement.

Labor protections are at risk: Pending policy changes threaten to reduce worker bargaining power even further. When it comes to policies that protect wages, workers have more to fear this year than on any other Labor Day in recent years.

One can argue that the best wage protection for workers remains a union job: on average, workers in unions earn more than 13 percent more than do workers in similar non-union jobs. The U.S. Supreme Court is taking up Janus v. AFSCME, which would cripple the ability of unions to collect dues, at the same time that a network of state policy think tanks is set to launch an all-out effort to enact so-called Right to Work laws that undermine the ability of workers to choose a union to represent them in collective bargaining.

Disappointing wage growth is now the most important story of the economic recovery. The “failure to launch” of wages is hard evidence of the need for strong policies to raise wages. In their absence, paychecks are unlikely to turn around anytime soon.